Product bundling : Theory and application

For more than three decades, microeconomists have been studying the conditions under which product bundling is a remunerative sales strategy. Only recently, bundling aroused the interest of marketing academics. Until now, no serious attempts have been made to integrate the existing research streams in the bundling literature. A first merit of this paper is the integration of the existing microeconomic and marketing literature on product bundling in a comprehensive framework, which allows us to point out the lacunas. It turns out that little has been said about the actual implementation of a bundling strategy. One of the hardly addressed issues is the derivation of bundle reservation prices, which are indispensable when determining the optimal bundle composition and price. Therefore, as a second merit, we present a new method to compute bundle reservation prices on the basis of paired comparison choice data and the latent class binomial logit methodology. We then apply our method to the case of multiple textbook bundles and use an existing LP bundling procedure to compute the optimal bundle compositions and prices.